Canadian crudes have been replacing heavy oil from Venezuela and Mexico at the Gulf Coast, due to production declines in both countries. "Canadian barrels are a great fit for Gulf Coast refiners right now. It's just a matter of getting those barrels down here," said a Gulf Coast trader. Western Canada Select for February delivery traded Thursday at $25.05 per barrel below West Texas Intermediate, the widest since December 2014. Including transportation costs of between $11 and $14 a barrel to ship the crude by rail to the Gulf Coast, it is affordable to more refiners, said analysts and traders.
"Based on where the differentials are today, as an oil producer, you're incentivized to ship product by rail to the Gulf Coast," said Matt Murphy, a Tudor Pickering researcher. The current differential is driven in part by increased supplies. Canadian crude oil production averaged 4.2 million barrels per day in 2017, according to National Energy Board estimates, up from 3.9 million bpd in 2016.
Production is expected to rise further this year as new projects like Suncor Energy's 190,000 bpd Fort Hills oil sands plant expand operations. However, the increase in shipments will be capped by railroad operators' willingness to accept spot deliveries. Companies such as Canadian National Railway, have insisted on long-term crude-by-rail commitments before providing more rail capacity.